Simplified: Suppose the entire economy is you and me and a dollar and a car. You have one dollar, I have the car and I want to sell it. The most that car can cost is $1 because that is all you have. Now, suppose that somehow you have $2 instead of $1. Now the car can cost $2. That is inflation: the "supply of money" increased while the amount of things to sell did not.

Posted by Dave Johnson at October 5, 2005 11:30 AM

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Inflation is a mechanism for redistributing wealth. One guess which way.

Posted by: richard at October 5, 2005 1:51 PM

I've been saying for a long time that we have rampant inflation, at least here in NYC, and that the powers that be aren't admitting it. There are plenty of causes, depending on the times, and it's not at all as simple as supply and demand. In NYC, landlords will sit on thousands of empty apartments rather than lower rents, for example. And it looks like the supermarkets would rather let lettuce rot in huge piles rather than charge less than $3 a head, too. Even so, prices are now rising "legitimately" because of rising shipping costs.

Also, of course, Bush's endless borrowing and huge deficits are causing inflation. "Cheap" money is not exactly cheap. it's just dropped in value and prices rise because the money itself is literally worth much less. That's inflation. In NYC, people making $60,000 a year are considered "working poor." That's inflation.

Posted by: MJ at October 5, 2005 2:08 PM

Thank you for the link. I wrote a follow-up to the "What Is Inflation?" article that offers some tips on how to protect yourself from inflation's effects. With Bush & Greenspan at the helm, we need all the protection we can get!